MEDIA RELEASE With a May 2019 Federal election creeping closer, the tax changes proposed by Labor in the areas of negative gearing, capital gains tax and dividend imputation are worth a closer look, says Jonathan Philpot, wealth partner with HLB Mann Judd Sydney.
“There will be a significant impact, both short term and long term, from these three areas of tax changes, if Labor wins the next federal election and implements them in their current form,” he says.
“Labor have committed to abolishing negative gearing on existing residential property with only negative gearing on new property developments to continue.
“With the property market already going through difficult issues with the banks tightening on lending, limited access to interest only loans, and a general downturn in the property market, many potential investors are probably already on the sidelines.
“If a Labor win looks certain, there may be some short term support for the property market; however once changes take place, we would expect to see further weakness in the property market.
“Over the longer term, if less rental property becomes available over time, we would expect to see rental yields increase, possibly even to the point where they start to become positively geared.”
Another issue will be what other measures people will then consider to reduce their personal taxable income, he says.
“Personal super contributions of the difference between the $25,000 maximum limit and the compulsory SG contributions may provide a large tax deduction.
“Particularly for those over age 40, contributing more into superannuation for the primary reason of a tax deduction may be a sufficient incentive to lock money away until retirement.”
Capital gains change
“The Labor proposal to halve the CGT discount from 50 per cent to 25 per cent on all investments after a specified date, may lead to a surge of investment, particularly into the sharemarket, prior to the change.
“Unlike property, share investing is generally positively geared with the ASX dividend yield plus franking credits about 5.5 per cent, which is higher than most borrowing costs.
“For long term investors, moving cash into shares before these changes commence will lock in the significant tax advantages of capital gains being a 50 per cent discount to taxable income.
“Over the longer term, while the advantage will be diminished, growth assets will still provide some tax advantages over income assets – such as term deposit and bonds – with the reduced discount of 25 per cent.”
He says ownership structures – whether it is investing in lower earning spouse’s name, or setting up investment structures through a family trust and investment company – will become even more important with increased personal tax rates.
“If all beneficiaries are in the highest tax bracket, an investment company may be the most tax effective structure to invest long term wealth. The capital gains tax rate is not discounted, but the 30 per cent tax rate is now lower than the 25 per cent discount to the top marginal tax rate plus Medicare levy of 35.25 per cent.”
Loss of franking credit tax refund
“The loss of franking credit tax refunds is one of the more controversial changes, given how retirees will be impacted depending on whether they receive the Age Pension or, strangely, whether they are in a superannuation fund that has more members in the accumulation than pension phase and can utilise all of the franking credits.
“Most SMSFs currently receive a tax refund of these franking credits and appear to be particularly disadvantaged against the larger industry funds.
“It will be interesting to see whether Labor proposes any changes, as this measure disadvantages those that currently fall just outside the Age Pension assets limit of $848,000 (for a couple that own a home).
“Over the longer term, while these changes decrease the attractiveness of Australian shares – in particular the high yielding shares such as bank stocks – they remain a better income solution than international shares and, with the current low interest rates, than term deposits and other fixed interest investments.
“It is difficult to see companies changing their shareholder offers such as Share Buy Backs, given the large super funds are bigger shareholders than SMSFs; however in the future, whether an individual or a SMSF participates in the offer would depend on whether they will benefit from the franking credits.
“These issues are likely to dominate discussion for investors during 2019, particularly in the lead-up to the early Federal Budget, and the election itself, meaning it is still likely there will be some adjustments to any or all of these proposals,” Mr Philpot says.